I am a philosopher who was an associate of the late Ayn Rand, and since 1986 I have been a member of the board of directors of the Ayn Rand Institute. I have taught philosophy at Hunter College (CUNY) and the University of Texas at Austin. My forthcoming book, "How We Know," is on the theory of knowledge. My blog is at www.hblist.com.

No President Obama, We Can't "Outcompete" Other Countries

In a campaign speech, President Obama said: “I know we can outcompete any other nation on earth.”

No we can’t. We can’t outcompete Germany, China, France—we can’t outcompete any other country. In fact, no country can outcompete any other. The very concept “outcompete” makes no sense on a national scale. One business can outcompete another business, but a nation can’t outcompete another nation across the board.

A nation is not one business. It is not many businesess all in the same line of work. A nation contains a huge array of businesses in a great variety of fields, from fishing to finance, from advertising to advising, from manufacturing to moviemaking. A nation outcompeted in one line of work—say, chip-manufacturing—automatically gains a comparative advantage in some other line of work–say, moviemaking.

Comparative advantage is a different animal from absolute advantage. Bangladesh probably has no absolute advantage over the U.S. in any line of work. But there’s still the best of the worst: what Bangladeshis do the least badly at producing. That’s where their comparative advantage lies. That’s what it pays them to specialize in producing.

Suppose Bangladesh firms have a comparative advantage in sewing garments. Even if Americans are better at it than Bangladeshis, both countries gain if Americans outsource their garment-sewing work to Bangladesh firms and shift American resources into producing the things we do even better than they. We will get a bigger bang for the buck from investing in the things that we do best, paying Bangladeshis to do the sewing—paying with the higher output in our most efficient areas of production.

This is not rocket science. The Law of Comparative Advantage was discovered by David Ricardo about 200 years ago, before there were rockets. Economists know this Law, but they don’t seem to communicate it to the public.

Here’s the common example of The Law of Comparative Advantage. Even if an executive is a better typist than his secretary, it pays him to hire her to do his typing, because that frees up his time for work in his area of comparative advantage: helping run the company.

When a nation loses sales to a foreign competitor in one line of work, that merely shifts its area of comparative advantage. And it cannot lose sales in all lines of work, because there will always be what it is least inferior at producing–i.e., in which it has a comparative advantage, so it will pay foreign nations to buy those products. Sales of those products will increase.

Very relevant is the cause of being outcompeted in a given line of work. It could either be due to the foreign nation becoming more efficient in that endeavor or to the domestic nation becoming less efficient, perhaps because of (to name a plausible factor) strangulation by government-backed unions.

When the rise of the foreign industry is due to it becoming more efficient, producing more goods with the same resources, both nations gain. It’s win-win. Sure, domestic investors in the outcompeted industry lose, but domestic investors in the correspondingly expanded industry win. On the average, people in both countries get richer. Why? Because now there’s more output, more product, more goods and services without any increase in real costs. That’s what gaining in efficiency means.

In a global marketplace, what counts is total world production. If that goes up, it benefits the average citizen of every nation. It is the goods and services produced, not the paper money, that make up the standard of living. More output means a higher standard of living.

International trade is always product traded for product, exports for imports. Remember Say’s Law: supply constitutes demand: you pay for the product of others (whatever nation they live in) with your product. International trade is still trade—the exchange of goods and services for goods and services. Money is just the intermediary.

On the other hand, if the cause of loss of sales is rising government intervention and greater government spending everyone loses—because less is produced. There are then fewer cars, computers, and cosmetics to be had. And then the citizens of the government-hampered country should scream bloody murder—not at the foreign competitors, but at their own government, including at President Obama.

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